An ongoing review of politics and culture

One of my first posts on my Text Patterns blog was about the rather sudden and unexpected shutdown of two web services, Stikkit and Sandy, and the anger that shutdown prompted against the services’ providers. We’re going to be hearing many more such stories, I think, during the recession/depression. Sites that have been funded by VCs while their creators have been trying to come up with a business plan are going to find themselves out of cash, and are going to shut down, and their users — accustomed to free services — are going to be seriously ticked off. And of course larger companies are going to be closing down unprofitable projects, with similar consequences. There’s even a website devoted to tracking such closings: It Died.

It Died took me to a really interesting rant by Jason Scott about the closing of AOL Hometown. (And there’s a follow-up rant here.) Jason’s point is that, just as landlords can't simply evict a renter for no cause and with no warning but have to follow carefully specified procedures, so too virtual landlords shouldn't be given unlimited right of eviction. There needs to be, Jason says, some kind of website eviction law — or, failing that, a volunteer Archive Team that vacuums up the data of doomed websites and hosts it until people can rescue their data. (Jason came up with the volunteer idea after his legal ideas were descended upon by the SLV.*)

I don't know what I think about all this, except that there seems to be more and more to be said for the 37signals philosophy: if the creators of web services charge money for their product, they’re more likely to be able to keep offering it. The people at Jott, an excellent phone-to-web service for reminders and to-do lists, have come to this conclusion: they’re eliminating their free plan. Howls of outrage to commence immediately.

Cross-posted from Text Patterns, mainly to see if I can elicit a thought or two from Jim Manzi.

*Slashdot Libertarian Vigilantes

Leave a Reply

My forecast for venture-backed start-ups that have not achieved cash flow break-even is simple (and stolen from Mr. T’s prior to his fight with Rocky): “pain”.

If a web content or service delivery business doesn’t have a huge number of eyeballs to monetize as advertising, some kind of rev share based on lead sharing of one sort or another, or some kind of direct consumer revenue like subscription fees, it’s hard to see how it can get to postive cash flow. If it can’t, it’s hard to see the VCs ponying up for the next round in most cases.

When this happened last time, ’01 – ’03, some prior rounds had been huge so these zombie companies could limp along for a very long time. My genenral impression (not backed up by any analysis) is that there are way fewer of these mega-rounds this time around, partly because the start-up costs for a web business are so much lower now than ’95 – ’00. Therefore, we’re likely to see many web business fold in ’09. I think trying to regulate this in a manner similar to physical real estate would be a disaster.

The great expression in Silicon Valley circa 2003 for all of the MBAs and BS artists who had competed by press release during the boom packing up to go find their next scam was “the tourists are going home”. They’re going back home again.

Alan
I have to think consumer response to the charging for these service is going to depend on culture of charging, brand loyalty, and suitable alternatives.

First, if everyone expects to pay for these services, people will be less upset when there is a cost. right now, given the way web services build support early by not charging their consumers, this is unlikely to change anytime soon. Second, if one is really attached to a specific product/ brand, then they will be more likely to continue with it even if it cost them something. I’m thinking here of the recent Atlantic article on the potential change of the cost structure at the nyTimes… though I am currently a free web-user, I would be moderately likely to spend to get access if this free access is removed, just in the same sort of way I pay to get Atlantic articles even though I could get them free online. Finally, suitable alternatives… with the case of both the Time and Atlantic, I do not see a huge amount of suitable alternatives, thus building my willingness to spend.

The problem with the cost structure of internet start-ups is that they often need to offer free service early as it helps them build users, in so much as they can ride the coattails of VC funding. If they can develop a brand and offer a product that is in-substitutable, they are relatively likely to do ok when they have to start charging. If not, back to the drawing board.

Thanks, guys. Regarding all such matters I’m on the outside looking in, but what I don’t understand is free services shutting down without even a public attempt to find a revenue stream. I say “public” because I don’t know what’s going on behind the scenes, but in the case of Stikkit and Sandy (and many others), no one even offered the users the chance to pay — even though many users offered to pay. Nor was there any public attempt to put the services up for sale.

I remember a few years ago when a Mac developer named Brent Simmons (best known for NetNewsWire) had made a blog-editing app called MarsEdit that he just didn’t want to develop or maintain any more, so he asked if anyone wanted to buy the code from him. Another developer, Daniel Jalkut, said Sure, and has been developing and selling the app ever since. Why doesn’t this kind of thing happen more often, especially when there is at least some clear consumer demand?

I’m completely unfamiliar with the two services you describe, but huge issues for other companies trying to convert are that (1) it can cost a lot of money to do so, and (2) the guys operating the company can think the odds of success are so low that they’d rather just walk away and do something else with their time.

Most VCs have recourse to the code (usually escrowed) from any company that they back, and it is usually auctioned off or licensed after bankruptcy if there is sufficient interest to justify the costs of the auction.

Yeah, and re: Jim’s earlier point, I was talking to a buddy of mine in medical VC, and he was mentioning how his and others tolerence for sustained negative cashflow companies will be curtailed. Unfortunately, this means that unless some cost efficient auctioning system is in figured out, we better start buy graveyard plots for future Stikkets and Sandys.

I wonder if its best for companies like this to start with some type of pricing in place, or at least put it in place earlier. You might not be able to generate the user list quickly though as the list of people willing to pay for unproven, unteseted, unknown software is low… 30 day free models might function as some type of middle ground.

I would suspect that the biggest change we might see in this regard is with respect to news organizations. It’s pretty clear that the internet is killing newspapers and other primary news-gathering organizations. I wonder when they’ll figure out that people will take for free over what they have to pay for most any day of the week and try to recoup some costs?